2020 (10) TMI 836 - AT - Income Tax

Status of the partnership firm treated as AOP - partnership deed is executed on an inadequate stamp paper - whether no such condition is no where spelt out in provisions of section 184 or 185 of the Income Tax Act, 1961? - AO disallowing entire partner's salary for the reason that it is treated as AOP and assessed as AOP - HELD THAT - Procedural laws merely prescribing the manner in which such rights and responsibilities may be exercised, in this case the stamp paper on which the partnership deed has been executed cannot alter the status already determined substantively. The decision of the Hon‟ble Supreme Court referred by the Ld. CIT(Appeals) BIHARI LAL JAISWAL AND OTHERS 1995 (11) TMI 2 - SUPREME COURT in respect there to, we also agree that while deciding an issue under the Income Tax Act, other legislations allied laws has to be considered. But in this case of the assessee, substantively nothing has been brought against the assessee by the Revenue Authorities. As assessee firm is already registered under the Assistant Registrar of Firm, Pune, Maharashtra, PAN has also been allotted as firm and even in the assessment order, the status of the firm is mentioned as that of the partnership firm. Department is accepting all the genuineness of existence of the partnership firm and only for this technical aspect of deed executed in the lessor denomination stamp paper has framed the assessment treating the assessee as AOP. Revenue Authorities may call upon the assessee in due course for rectification of this technical defect. In the totality of facts and circumstances and on examination of this issue as afore-stated, we are of the considered view that the assessee is duly constituted partnership firm. Hence, we set aside the order of the Ld. CIT(Appeals) on this issue and direct the Assessing Officer to provide appeal effect accordingly. Thus, Ground Nos.1 and 2 raised in the appeal are allowed. Disallowance u/s 40(a)(ia) - TDS on architect fees and labour charges deducted on the same but was not paid till 31.03.2012 - assessee‟s Counsel stated that the said amount had not been deposited in the Government‟s account - scope of amended provisions of Section 40(a)(ia) - HELD THAT - One final opportunity should be provided to the assessee for proper verification of facts whether TDS were deducted or whether the same were deposited in the Government account and also for the fact that the Ld. DR did not raise any objection, we restore this matter to the file of the AO for verification as directed above and adjudicating the matter while complying with the principles of natural justice. Thus, Ground No.3 raised in appeal by the assessee is allowed for statistical purposes. Enhancement of income - additional sales declared and admitted by the assessee or not? - Amount received in cash which was not recorded in the books of account to the assessee firm - HELD THAT - It is clear that if in the additional income offered for taxation, the said amount of ₹ 3,76,000/- is not found to be included then that would be taxed separately. But on the other hand, if the contention of the Ld.AR is found correct then already the said amount has faced taxation. The Assessing Officer shall verify accordingly. This issue is therefore restored to the file of the Assessing Officer for verification and adjudication while complying with the principles of natural justice as directed hereinabove. Thus, Ground raised in appeal by the assessee are allowed for statistical purposes.

Summary

Issues Involved:
1. Status of the partnership firm being treated as an Association of Persons (AOP) due to execution on inadequate stamp paper.
2. Disallowance of partner's salary due to the firm being assessed as AOP.
3. Disallowance of ?6,40,459/- under Section 40(a)(ia) of the Income Tax Act, 1961.
4. Enhancement of income by ?3,76,000/- by the CIT(A).
5. Propriety of CIT(A)'s power to propose enhancement of income by ?3,76,000/-.

Detailed Analysis:

Issue 1: Status of Partnership Firm as AOP
The Assessing Officer (AO) treated the partnership firm as an Association of Persons (AOP) because the partnership deed was executed on a ?200/- stamp paper instead of the ?500/- required under the Bombay Stamp Act, 1958. The AO argued that for the purpose of Section 184 of the Income Tax Act, 1961, the partnership must be evidenced by an instrument, and the inadequately stamped deed was not a valid instrument.

The CIT(A) upheld the AO's decision, citing Section 35 of the Indian Stamp Act, which mandates that an instrument must be duly stamped to be admitted as evidence. The CIT(A) relied on the Supreme Court's decision in Biharilal Jaiswal Etc. Vs. Commissioner of Income Tax (1996) 217 ITR 746, emphasizing that one arm of the law cannot be used to defeat another.

However, the Tribunal held that substantive law prevails over procedural law. The Tribunal noted that the partnership firm was registered with the Assistant Registrar of Firms, Pune, and the partnership deed was accepted despite the stamp paper issue. The Tribunal concluded that the procedural defect of insufficient stamp duty does not override the substantive existence of the partnership firm. Hence, the AO's and CIT(A)'s decisions were set aside, and the firm was recognized as a partnership firm for tax purposes.

Issue 2: Disallowance of Partner's Salary
Since the partnership firm was incorrectly assessed as an AOP, the AO disallowed the partner's salary of ?25,00,000/-. The Tribunal, having recognized the firm as a partnership, directed the AO to allow the partner's salary as claimed.

Issue 3: Disallowance under Section 40(a)(ia)
The AO disallowed ?6,40,459/- (comprising architect fees and labor charges) due to non-payment of TDS before the due date. The CIT(A) confirmed this disallowance, noting that the amended provisions of Section 40(a)(ia) effective from 01.04.2013 were not applicable to the assessment year 2012-13.

The Tribunal, considering the assessee's request for another opportunity to provide evidence, remanded the matter to the AO for verification of TDS payment and compliance with the principles of natural justice.

Issue 4: Enhancement of Income by ?3,76,000/-
The CIT(A) enhanced the income by ?3,76,000/- based on the assessee's admission during a survey that a shop was sold for ?9,76,000/- but only ?6,00,000/- was recorded in the sale agreement, with the difference received in cash.

The Tribunal noted that the assessee had voluntarily offered ?47,30,459/- as additional income, which might include the disputed ?3,76,000/-. The Tribunal remanded the issue to the AO to verify whether the ?3,76,000/- was included in the additional income offered for taxation.

Issue 5: Propriety of CIT(A)'s Enhancement Power
The Tribunal did not explicitly address the propriety of the CIT(A)'s power to enhance income by ?3,76,000/-, but the remand for verification implicitly suggests that the Tribunal found it necessary to ensure the correctness of the enhancement.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal setting aside the AO's and CIT(A)'s decisions on the status of the partnership firm and partner's salary, and remanding the issues of TDS disallowance and income enhancement for further verification.